It’s no secret that prescription drugs are unaffordable for many Californians. In just five years, spending on prescription drugs ballooned from $8.7 billion to $12.1 billion, an increase of 39%, according to the most recent state data.

Consumer advocates and health economists are placing some of the blame on pharmaceutical middlemen, which they say needlessly drive up costs by tacking on fees and withholding discounts as profit. It’s a problem that has plagued regulators across the country. This week, California lawmakers are set to vote on first-time regulations aimed at curtailing their tactics.

Pharmacy benefit managers, also known as PBMs, most often serve as intermediaries between insurance companies and drug manufacturers. They process claims, negotiate the price of drugs using a complex system of rebates, and control the list of drugs that health insurance plans cover, also known as a formulary.

They’re already regulated to some degree in most other states, including Texas and Florida. The California proposal would require the state insurance department to license pharmacy benefit managers, and would require pharmacy benefit managers to disclose prices paid and discounts negotiated with drug manufacturers. It would also mandate that 100% of the discounts from drug manufacturers be passed onto health insurance plans.

“(Pharmacy benefit managers) have insinuated themselves into the nerve center of the health system where they exercise enormous leverage over the health plans, over the pharmaceutical manufacturers, over the consumers,” bill author Sen. Scott Wiener said. “They’re making enormous amounts of money at the expense of consumers.”

The companies argue that they save money for patients and insurance plans — the more patients they represent, the more leverage pharmacy benefit managers have to negotiate lower drug prices, for example. They are fiercely opposed to the legislation and warn that the proposed regulations will increase health premiums for Californians by $1.7 billion in the first year and $20 billion over a decade.

“The bottom line is (Senate Bill) 966 does nothing to reduce prescription drug costs or improve patient access and safety,” said Greg Lopes, a spokesperson for Pharmaceutical Care Management Association, an industry lobby for pharmacy benefit managers

Three pharmacy benefit managers dominate the industry: CVS Caremark, Express Scripts and OptumRx represent more than 80% of the market.

Increasingly, research suggests consolidation drives prescription drug prices higher. The biggest player, CVS, has grown to encompass the familiar retail pharmacy stores, pharmacy benefit management services, and health insurance through a merger with Aetna.

“They’re way overdue for regulation,” Wiener, a Democrat from San Francisco, said.

Previous attempts to regulate pharmacy benefit managers have failed in California. In 2021, Gov. Gavin Newsom vetoed legislation that would have prevented pharmacy benefit managers from “patient steering,” a practice that forces patients to use only specified pharmacies that are also often owned by the pharmacy benefit managers.

“In California we’re really behind. They have been far more aggressive in other states regulating (pharmacy benefit managers),” said Michelle Rivas, executive vice president of government relations at the California Pharmacists Association, which co-sponsored the bill. “The ideal would be comprehensive federal legislation. Unfortunately, we don’t have the luxury of time to wait for Congress to move on this issue.”

While more than a dozen proposals have been introduced in Congress, to date none has passed. A recent report from the Federal Trade Commission, which is investigating pharmacy benefit managers, suggests that the largest organizations may be engaging in practices specifically to evade regulation, such as moving portions of their operations out of the country.

“These guys are smart and historically we’ve seen them evolve and we’ve seen them find ways to make more money,” said Geoffrey Joyce, director of health policy at the USC Schaeffer Center who studies pharmaceutical markets.

California’s effort to regulate pharmacy benefit managers is commendable, Joyce said, but he’s pessimistic that regulators can adapt as quickly as the market changes.

Concessions to pharmacy benefit managers

Wiener’s bill would break new ground in California, but it won’t go as far as he intended.

Amendments to the proposal significantly curtailed its reach in the final days of the legislative session. Industry groups requested the changes, but Wiener said the remainder still leaves “a very strong bill.”

Previous versions of the proposal would have prohibited pharmacy benefit managers from paying pharmacies less for a drug than they charge insurers and keeping the difference as profit. It would have also prohibited insurers from paying out bonuses based on drug cost savings.

The Assembly Appropriations Committee, which is chaired by Buffy Wicks, a Democrat from Oakland, struck those provisions.

Wiener said neither he nor the industry opponents got everything they wanted. Wicks’ office did not respond by deadline to a call asking why the amendments were added when the bill had previously made it through all committees and the Senate without a single no vote.

Lopes, with the pharmacy benefit manager lobby, said the group remains opposed to the bill even after the amendments.

“While we are taking a close look at the new language and its implications, it’s evident the bill still benefits Big Pharma at the expense of California patients,” Lopes said.

Pharmacy benefit managers argue that federal investigations and criticism of their business practices are flawed and misguided. As middlemen, pharmacy benefit managers are able to negotiate prices with pharmacy chains, health insurers and drug manufacturers on behalf of their clients. Designing preferred pharmacy networks, formularies and discounts are all strategies that allow pharmacy benefit managers to keep prices reasonable, said Ed Devaney, president of the employer division at CVS Caremark.

“This bill would not allow employers to continue to leverage those cost containment solutions that they have enjoyed over the last 10 to 20 years,” Devaney said. The proposal is also opposed by health insurers, some unions, and a coalition of business associations.

CVS Caremark is the largest pharmacy benefit manager in the country, representing more than 100 million members. Devaney said CVS passes 99% of rebates to consumers and that it has no issue with increased transparency.

Instead, the benefit managers blame pharmaceutical companies for skyrocketing drug prices.

‘No saints’ in pharmaceutical industry

Reid Porter, a spokesperson for Pharmaceutical Research and Manufacturers of America, said Wiener’s proposal is a “step in the right direction” but that California legislators have more work to do to address “the perverse incentives and harmful practices of PBMs that lead to higher costs, including higher premiums, that patients face.” The trade organization representing drug companies supports Wiener’s measure.

Drug manufacturers have long accused pharmacy benefit managers of holding prescription drugs hostage in order to get bigger rebates that patients never see. Rebates made up just 17% of the $12.1 billion spent on pharmaceuticals in 2022, according to the Department of Managed Health Care’s most recent drug cost report.

Joyce of USC said both players are at fault.

“There are no saints. Everyone is trying to make a buck,” Joyce said.

Pharmacy benefit managers representing tens of millions of patients have enough leverage to negotiate lower drug prices, he said, but the problem is that their business practices are so opaque no one really knows how much in savings is being passed down to patients and how much benefit managers are keeping in profits.

Joyce said he has also witnessed negotiations where manufacturers withhold price discounts if the benefit manager includes coverage of competitors’ drugs.

“They run an opaque, non-transparent business, and that is never good,” Joyce said.

The Federal Trade Commission report suggests that pharmacy benefit managers increasingly make money through administrative fees and other payments tacked onto services.

Despite the leverage pharmacy benefit managers may have, Kevin Schulman, a professor of medicine at Stanford University, research shows they have only ever driven drug prices up — not down.

For example, although generic or biosimilar insulins have been available for years, patient use of the cheaper alternatives has remained low because pharmacy benefit managers exclude the generics from covered benefits in lieu of higher-profit, name-brand insulins. Newsom’s initiative to manufacture low-cost, generic insulin for Californians, will face a similar challenge, Schulman said. Schulman was an advisor to Civica Rx, the company tapped by Newsom to run its insulin project.

“This strategy results in them being able to pocket billions of dollars,” Schulman said.

###

Supported by the California Health Care Foundation (CHCF), which works to ensure that people have access to the care they need, when they need it, at a price they can afford. Visit www.chcf.org to learn more.

CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.